More Than 1 in 4 Americans Would Now Cash Out Their IRAs if It Weren't for the Penalties Involved

Are you tempted to touch your long-term savings?

It's been a tough year for investors in several regards. First, the stock market has been very volatile, and that's resulted in a lot of people seeing losses in their brokerage accounts.

Also, inflation has been soaring all year, putting a strain on consumers' budgets. Those with cash tied up in investments may be frustrated over the fact that money has gotten tight, yet they can't access their investments either because doing so would mean taking a loss, or incurring a penalty in the case of an IRA.

In a recent Wells Fargo survey, 77% of investors said they're concerned about recent fluctuations in the stock market. And 66% say they're nervous about their money.

Some investors are so nervous that 42% want to cash out their portfolios, take the money, and run. And 29% say that they actually would cash out their IRAs if it weren't for the penalties involved.

But cashing out an IRA early is a poor decision not just because of the penalties that could ensue. There are other negative consequences to tapping an IRA ahead of retirement that investors should know about.

Don't tap your savings early

Taking money out of an IRA before age 59 ½ will typically result in an early withdrawal penalty. Now there are exceptions, such as if you're taking an early withdrawal to pay for higher education or buy a first-time home (for the latter, you can withdraw up to $10,000 from your IRA penalty-free).

But otherwise, if you take an early withdrawal, you can expect to lose 10% of the sum you remove off the bat. So if you withdraw $6,000 to cover a home repair, you'll be penalized to the tune of $600.

That's not all, though. You'll also pay taxes on your withdrawal so ultimately, you're not getting that full amount in hand.

Granted, those taxes aren't a penalty -- they're par for the course with an IRA and would apply after age 59 ½, too. But that's yet another reason to keep your money in place.

Another big reason to leave your IRA alone, though, has to do with your personal financial security during retirement. Every dollar you remove from your IRA ahead of retirement is money you won't have later in life, when you might need it even more.

Plus, when you take an early IRA withdrawal, you don't just lose out on your principal withdrawal. You also lose out on the sum that money would have grown into.

Let's say your IRA is invested somewhat conservatively, so it only gives you an average yearly return of 6%. If you take out $6,000 at age 30 and don't retire until 65, you'll lose out on 35 years of growth on that sum. So all told, you'll actually be down $46,000 after all's said and done. That's a pretty big deal.

Leave your investments where they are

Clearly, cashing out your IRA investments early isn't a good idea. But neither is cashing out investments in your brokerage account while they're down. If you do that, you'll simply lock in losses you might otherwise avoid by waiting things out. So while today's volatile market may be difficult to cope with, and inflation may be straining your budget, if you're able to avoid cashing out investments, it's really your best bet.